Determining the optimal threshold of foreign direct investment for sustainable improvement in Ghana's trade balance

Purpose - The main purpose of this study is to evaluate the threshold impact of foreign direct investment (FDI) on Ghana's trade balance. Design/methodology/approach - The study used annual time-series data, spanning 1980-2022. The study employed the autoregressive distributed lag (ARDL) models, error correction models and smooth threshold regression techniques to establish the relationship between FDI and trade balance. Findings - The result of the study shows a positive and significant effect of FDI on trade balance in the short and long run on the Ghanaian economy. The study further revealed that the threshold value of FDI that would induce a positive trade balance for Ghana is 7.825%. Moreover, it was established that there is a unidirectional causality between trade balance and FDI flowing from FDI to trade balance. Practical implications - Ghanaian policymakers ought to establish an FDI threshold monitoring mechanism to ensure inflows surpass 7.825%, promote investment diversification to mitigate reliance risks, enhance the investment climate and regulatory framework, strengthen export promotion initiatives and invest in human capital and technology transfer across key sectors for a favourable and sustainable trade position. Originality/value - This study is the first among its kind in Ghana and the first to apply both the ARDL and smooth threshold regression techniques in the same study.